Can I Be Denied a Mortgage Loan After Being Pre-Approved?

Reader question: "I'm hoping you can settle an argument for me. I was pre-approved for a mortgage loan about 10 days ago, and we are now starting to look at houses for sale. My husband said we have to be careful what we do with our finances because we can still be denied for the loan, even though we've already been pre-approved by the lender. Is this true? I thought the difference between pre-qualification and pre-approval was that the latter was more set in stone."

I hate to be the cause of any marital discord, but your husband is right on this one. You can certainly be denied for a mortgage loan after being pre-approved for it. The main difference between pre-qualification and pre-approval has to do with the level of scrutiny -- not the level of certainty.

When a lender pre-qualifies you for a loan, they just take a quick look at your financial situation. Then they throw out a number they might be willing to lend you. It's all very breezy and informal (i.e., worthless). The pre-approval process goes deeper. This is when the lender actually pulls your credit score, verifies your income, etc.

But neither of these things guarantees you will get the loan. The only time you can be 100% certain of your mortgage approval is when you close the deal. Up until that time, there are plenty of things that can derail the process. So yes, you do need to be careful with your finances between now and your closing date.

The Pre-approval Process Explained

I want to talk a little more about the process that takes place here, for readers who aren't familiar with it. Getting pre-approved for a mortgage loan is a good idea for several reasons.

It helps you identify any problems you have in terms of mortgage approval.

It helps you get a real estate agent, since most of them won't work with buyers until they've been pre-approved.

It helps you limit your house-hunting process to the types of homes you can actually afford.

And it makes sellers and their real estate agents more inclined to take you seriously. This is important when it comes time to make an offer.

This is why I recommend that every home buyer gets pre-approved before shopping for a home. It's a quick and easy process with plenty of benefits.

The pre-approval process itself is very similar to the final approval. In fact, they overlap in many ways. When you get pre-approved by a mortgage lender, they will start gathering a variety of financial documents. They will have you fill out a mortgage application, provide your tax records for the last couple of years, and show verification of income. They will also check your credit scores to see if you meet the minimum requirements for mortgage loan. Learn more about the process.

Based on all of this research, the lender will tell you what size loan you're qualified for. They may also quote you an interest rate, though it's not required at this stage. A few days after you submit an application, the lender should also provide you with a Good Faith Estimate. This document gives you an estimate of what your closing costs will be.

But the pre-approval is not a guarantee. Therefore, it's possible to be denied for a mortgage even after you've been pre-approved. Why? Because the lender will check many of those financial requirements again, when you get closer to closing day.

What Can Happen After Being Pre-Approved

When I explained the basic pre-approval process earlier, I touched on some of the key factors the lender will review. These include your credit score, income, debts, any other assets you have. Your mortgage pre-approval is based on your performance in these categories. So if any of these criteria change between now and your scheduled closing date, you could be denied the loan.

Examples:

If something negative hits your credit report and lowers your credit score, it could push you outside the lender's qualification guidelines. So they could deny you the mortgage loan even after you've been pre-approved.

You could also face problems if your income changes in some way. It obviously won't hurt you if you get a raise. But what if you or your spouse loses a job? Or what if you suffer some other kind of income loss? This will affect everything from your debt ratios to your basic qualifications. If the lender finds out about it before the closing, you could be denied the mortgage loan.

The same goes for changes in assets. If you were pre-approved based on certain assets you have, you would need to retain those assets through the closing process.

If your debt level rises significantly for some reason, it could raise a red flag with the lender. They might not find out about it. But if they do, it could push your debt ratios outside of their minimum requirement.

Lastly, you could be denied a loan after being pre-approved due to some change in the loan requirements. Let's say you got pre-approved with a credit score of 610. But a couple weeks later, the lender tightens up their credit requirements for home loans. Now they're requiring borrowers to have a score of 640 or higher. If they impose this new requirement for all borrowers going forward, it shouldn't affect you. But if they apply it retroactively for buyers who have been pre-approved, it could cause you to be denied the mortgage.

It's Best to Maintain the Status Quo

The best thing you can do between now and your closing date is to maintain the status quo. By that, I mean keeping everything the same from a financial angle.

Don't tap into your savings account.

Don't switch jobs.

Don't do anything that could reduce your assets or increase your debts.

Continue to put as much money aside as possible, in case your closing costs are higher than estimated.

If you do these things, you should be able to keep the mortgage process on track. But if you have any major changes in these areas, you can still be denied for a mortgage after being pre-approved.

If you would like to learn more about any of the topics covered in this lesson, you can use the search tool at the top of this page. It will give you access to hundreds of articles on the home buying process. Good luck.